Eye on the fees
State pension funds are getting better management
It’s a start. Keep going. That was the message that state Auditor General Eugene DePasquale and state Treasurer Joe Torsella last week gave to the State Employees’ Retirement System, which operates the pension fund for retired state workers.
While SERS’ efforts to spend less money on managers has borne fruit — it shelled out $167 million last year, compared to $345 million in 2007 — Mr. DePasquale issued an audit urging the system to cut some more. Mr. Torsella issued a statement underscoring Mr. DePasquale’s remarks, saying he applauded “recent steps SERS has taken to reduce fees while urging the system to accelerate and intensify those efforts.”
That was the right message, considering SERS has an unfunded liability of $19.5 billion and posted a lower-than-expected 6.5 percent investment return last year. It all means SERS should pour every dollar possible into the pension fund.
The Public School Retires’ Retirement System also needs to do more to rein in fees, Mr. DePasquale noted in an audit of that big pension fund he released in May. Also underfunded, it spent more than $416 million on investment manager fees last year, down from $441 million the year before. At the time, Mr. DePasquale quite rightly said PSERS shoud have a “never-ending focus” on fee reduction.
Management fees are more than a waste of money. The competition for the state’s business feeds a pay-toplay mentality, and Harrisburg needs less corruption, not more.
Mr. Torsella, a member of the SERS and PSERS boards, is leading by example. In April, he announced that he was transitioning all $2.4 billion in publicly held stocks to passive investing, a move he estimated with save tens of millions of dollars over 20 years. The aim is to build gains over time, forgoing windfalls, sudden losses and fees associated with active management. He also did away with middlemen who try to bring the state and investment companies together.
“We shouldn’t treat investing public funds like a casino game, trying to ‘beat’ the market, and paying casino prices to do it,” Mr. Torsella said at the time. “Instead, we should capture the underlying market return at the lowest possible cost. ... We can’t control investment performance or consistently beat the market, but the one variable we can control is costs — and I have a fiduciary obligation to taxpayers to do so.”
In case anyone doubted him, Mr. Torsella cited this statement by super-investor Warren Buffett: “When trillions of dollars are managed by Wall Streeters charging high fees, it will usually be the managers who reap outsized profits, not the clients. Both large and small investors should stick with low-cost index funds,” Mr. Buffett said in a Feb. 25 letter to investors in his company, Berkshire Hathaway Inc.
Last fall, SERS moved $3.9 billion in assets into passive investing, something that helped with fee reduction in 2016 and should help even more going forward. Mr. DePasquale also recommended competitively bidding contracts with managers and taking a tougher stance in fee negotiations. That is advice worth heeding.